Limited Companies

Definition
A Limited Company is a separate legal entity – seen as a person separate from the shareholders. The
Company is owned by Shareholders and managed by Directors. Comparison of a limited Company to a
Partnership Limited Company Partnership
1. limited liability unlimited liability
2. number of members limited by number of shares limited to 20
3. profits shared by a dividend agreed profit sharing ratio
4. pay fixed rate of company tax. tax depending on profit share Terms used to describe share capital
1. Authorized Share Capital – maximum amount of share which a company is allowed to issue
2. Issued Share Capital – the amount of shares which have actually been issued to shareholders
3. Called-up capital – the money required to be paid by shareholders immediately when they buy shares
if the company does not require all the money to be paid in right away
4. Uncalled Capital – the amount which has not yet been paid by shareholders for shares bought
5. Paid-up capital – the portion of the Called-up capital for which the company has actually received the
cash
6. Calls in advance – money received from shareholders before a call is made by the company asking for
the next amount of money to be paid for the shares.
7. Calls in Arrear – money not yet received from shareholders after a call has been made by the
company
8. Forfeited Shares – shares forfeited by shareholders because they have failed to pay their calls. They
may be re-issued to other shareholders.
Types of Shares issued by companies
1. Ordinary Shares:
• Carry voting rights at meetings – one vote per share
• Ordinary shareholders are the last to receive a dividend
• In liquidation, ordinary shareholders are the last to receive their capital back
• The price of these shares is known as the PAR VALUE.
• Shares sold for a price above par value are sold at a SHARE PREMIUM (the amount above the par
value)
2. Preference Shares:
• Receive a fixed dividend
• Are paid a dividend before ordinary shareholders
• Can be: a) cumulative preference shares (paid arrear dividends)
b) non-cumulative preference shares (lose dividends if the directors do not declare)
Types of Reserves:
a) Revenue Reserves – are created by ploughing profits back into the company
Examples:
Retained Profit – profit not distributed to shareholders
General Reserve – created for general purposes in future
Fixed Asset Reserve – created to purchase fixed assets
Capital Reserves:
Share Premium – created when shared are sold above par value
Revaluation Reserve – when assets are revalued Capital
Redemption reserve – when a company buys back shares Bonus Issue of Shares (also known as a
‘Scrip’ issue)
If the Directors, consider that the Reserves are too high they may transfer some of the reserves to
the Ordinary Share Capital account. This means that the shareholders will receive shares (for free).
The company does NOT RAISE NEW CAPITAL in this way – no money is received for the shares.
The CAPITAL RESERVES (Share Premium; Capital Redemption and Revaluation Reserve) are usually
used to make bonus issues.
Bonus issues may be made when the directors decide not to declare a dividend in order to keep
shareholders happy. Right Issue These are shares issued to existing shareholders.
Advantages:
• Less expensive than a general issue to the public
• Control remains with existing shareholders A shareholder may sell his right to purchase additional
shares to someone else or he may simply forfeit the right.
Dividend policy Dividends are paid to shareholders as a way of distributing the profits of the
company. Dividends are normally expressed as “cents per share” eg. 10 cents for every share held.
Directors decide if a company will be paying out a dividend or not.
They look at factors such as:
1. the availability of profits
2. the availability of cash to pay the dividend
3. whether it would be better to keep the profits in the company to allow it to grow
4. whether the market price of the shares will be affected or not Directors may pay out a dividend
more than once per year. A dividend declared during the year is called an INTERIM dividend, and at
the end of the year it is called a FINAL dividend.
Debentures
A debenture is a document given to someone who has loaned the company money. It states the
amount of the loan, the interest payable each year, and the date on which the loan is to be repaid.
Debenture holders are liabilities of the company – NOT owners as it is with shareholders. The
interest must be paid regardless of the profitability of the company.
Debentures due to be paid within a year are shown on the balance sheet as CURRENT LIABILITIES.
Those due to be paid in more than one year are shown as LONG TERM LIABILITIES.
Convertible Loan
Stock These are debentures which give the holder the option to convert the loan amount into
shares of the company at a predetermined price on a predetermined date. When the date arrives, if
the market price of the shares is higher than the predetermined price then the holder will find the
option very attractive
Absorption (Total) Costing
DEFINITION
In this method of costing, all overheads (indirect costs) must be absorbed (recovered) by the products
produced. This method of costing on the full production cost (direct plus indirect costs) of manufactured
products.
NEW TERMS
1. Direct Costs – are those costs directly linked to a product being manufactured.
Eg: labour and materials needed to make the product.
2. Indirect Costs – those costs not directly linked to a product being manufactured (also known as
overheads).
Eg: administrative and selling expenses.
3. Fixed Costs – those costs that do not change as the amount of products manufactured changes
(in the short term). Fixed costs per product decrease as the level of production increases (and
vice versa). Eg: Rent expense.
4. Variable Costs – are those costs which change as the amount of products being manufactured
changes. Variable costs per product do not change as the level of production changes. Eg Raw
Materials.
5. Total Costs = Fixed Costs + Variable Costs 6. Cost Centre – any department or process in a business
to which costs may be attributed

APPORTIONING COSTS TO PRODUCTION COST CENTRES

Direct costs and some indirect costs (overheads) can be identified and allocated to specific cost centres.
Other indirect costs (overheads) incurred are apportioned between cost centres on one of the following
bases:
a) Floor area
b) Cost or Book Value of the assets in each centre
c) Number or value of requisitions (orders)
d) Number of personnel in this way the Total Cost per cost centre can be calculated.

APPORTIONING SERVICE COST CENTRE OVERHEADS TO PRODUCTION COST CENTRES

Service cost centres provide services to the production centres.
Eg Stores, Canteens Maintenance etc. The overheads of service departments must be shared /
apportioned between the Production Cost Centres in order to calculate the Total Cost of goods
produced.
Methods of apportioning:
a) The Elimination Method
The costs of the service departments are apportioned between the Production centres and
other service centres. Once the costs of one service centre have been apportioned it is
eliminated from the next apportionment.
The basis of apportionment of the service centres could be:
a) Floor area
b) Cost or Book Value of the assets in each centre
c) Number or value of requisitions (orders)
d) Number of personnel
Example: Stores must be apportioned on the basis of personnel Canteen must be apportioned
on the basis of number of requisitions
No of personnel
20 10 30 5 5
No of Requisitions 15 5 10 2 7
Apportionment: Cutting Sanding Assembly Stores Canteen Overheads 10 000 12 000 24 000
3000 6000 First Apportionment (based on 65 staff) 923 462 1385 (3000) 230 Second App (based
on 30 requisitions) 3000 1000 2000 (6000) TOTAL COSTS 13923 13462 23385 -